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Calculate Efficiency Variances

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Assume that you manage your local marble slab creamery ice cream parlour. In addition to selling ice cream cones, you make large batches of few flavours of milk shakes to sell throughout the day. Your parlour is chosen to test the company's "Made-For-You" system. The system allows patrons to customize their milk shakes by choosing different flavours. Customers like the new system and your staff appears to be adapting, but you wonder whether this new system is as efficient as the old system where you made just a few large batches. Efficiency is a special concern because your performance is evaluated in part on the restaurant's efficient use of materials and labour. Assume that your superiors consider that efficiency variances greater than 5% are unacceptable. You decide to look at you sales for a typical day. You find that the parlour used 390 kilograms of ice cream and 72 hours of labour to produce and sell 2,000 shakes. Assume that the standard quantity allowed for a shake 0.2 kg of ice cream and 0.03 hours (1.8 minutes) of direct labour. Further, assume that standard costs are $1.50 per kilogram for ice cream and $8.00 an hour for labour.
1. Compute the efficiency variances for direct labour and direct materials.
2. Provide likely explanations for variances.
3. Do you have reason to be concerned about you performance evaluation? Explain.

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Assume that you manage your local marble slab creamery ice cream parlour. In addition to selling ice cream cones, you make large batches of few flavours of milk shakes to sell throughout the day. Your parlour is chosen to test the company's "Made-For-You" system. The system allows patrons to customize their milk shakes by choosing different flavours. Customers like the new system and your staff appears to be adapting, but you wonder whether this new system is as efficient as the old system where you made just a few large batches. Efficiency is a special concern because your performance is evaluated in part on the restaurant's efficient use of materials and labour. Assume that your superiors consider that efficiency variances greater than 5% are unacceptable. You decide to look at you sales for a typical day. You ...

Solution Summary

Efficiency variances are calculated. Special concerns for efficiency is determined.

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See Also This Related BrainMass Solution

Calculate the flexible-budget variance, calculate the price and efficiency variance for Bouquet.com

7-30
Josh Sanchez is the chief financial officer of Bouquets.com, an Internet company that enables customers to order deliveries of flowers by accessing it's Web site. Sanchez is concerned with the efficiency and effectiveness of the finance function. He collects the following information for three finance actives in 2004:

Rate per unit of Cost Driver

Activity Activity level cost Driver Static Budget Actual
________________________________________________________________________
Receivables Output unit Remittances $0.639 $0.75
Payables Batch Invoices 2.900 2.80
Travel expenses Batch Travel claims 7.600 7.40

The output measure is the number of deliveries, which is the same as the number of remittances. The Following is additional information:

Statc-Budget
Amounts Actual Amounts
________________________________________________________________________

Number of deliveries 1,000,000 948,000
Batch size in tems of deliveries:
Payables 5 4,468
Travel expenses 500 501,587

1. Calculate the flexible-budget variance for each activity in 2004
2. Calculate the price and efficiency variance for each activity in 2004

7-31
Josh, Sanchez, CFO of Bouquets.com, engages The Hackett Group, a consulting firm specializing in benchmarking. He asks Hackett to provide benchmark data of the finance function at "word-class" retail companies ( both traditional retail and internet-based retail) Hackett;s cost benchmarks for Bouquet.com's three finance activities are

Finance Activity "Worl-Class" Cost Performance
_________________________________________________________________

Payables $0.71 per invoice
Receivables $0.10 per remittance
Travel expenses $1.58 oer travel claim

1. What new insights might arise with the Hackett benchmark data using the amounts in Exercise 7-30?
2. Assume you are in charge of travel-claim processing. What concerns might you have with Sanchez using the Hackett benchmark of $1.58 over travel claim as the key to evaluate your performance next period?

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